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Second-Quarter Earnings and Tips on Analyzing the Numbers

Second-quarter earnings will begin to heat up next week. Thomson Reuters projects S&P 500 index earnings growth of 20.7% and revenue growth of 8.1% on a blended basis. (The blended number uses results from both the 20 S&P 500 companies that have reported as of this morning and the consensus forecast of analysts’ estimates for those companies that have yet to report.) Both growth projections are being boosted by big expected year-over-year increases in the large-cap energy companies’ earnings (141.2%) and revenues (19.9%). Only four of the 11 sectors comprising the S&P 500 aren’t projected to achieve double-digit growth in profits: consumer staples (9.6%), telecom services (8.1%), real estate (2.2%) and utilities (1.2%).chart

Tariffs and raw material costs will be among the things likely brought up during conference calls. The June Institute for Supply Management (ISM) manufacturing report included several comments about higher metal and component costs. Rising freight costs are another issue—and one that hasn’t been receiving as much attention. Nonetheless, economic growth is helping revenues, while lower taxes are helping net income.

Whenever a company you’re invested in, or are kicking the tires on, reports quarterly (or annual) results, it’s a good idea to look at the actual earnings report instead of relying on a news article or a headline. Doing so will give you a better assessment of how the company is actually faring. This week, I’m going to share with you some of things I look at when analyzing earnings. As I explained when I shared this list back in February 2017, it’s not a completely formulaic process since every company has different divisions and statistics, but it is something you can use as a checklist.

• Home in on Revenue, Earnings per Share and Net Income—The very first thing to do is to determine the rate at which revenues, earnings per share (EPS) and net income have changed. Have they grown or decreased compared to the same period a year ago? How do the growth rates for each line item compare to the other two? If profits grew faster than sales, the company’s margins widened. If sales grew faster, margins shrank. If EPS grew faster than net income, then EPS was boosted by a reduction in the share count. Depending on how the earnings release is formatted, it can be easier to simply calculate the growth rates yourself.

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Highlights from this month’s AAII Journal


AAII Sentiment Survey

Optimism declined to its lowest level in three months. At current levels, bullish sentiment is unusually low. More about this week’s results.

This week’s results:

  • Bullish: 27.9%, down 0.6 points
  • Neutral: 32.9%, up 2.1 points
  • Bearish: 39.3%, down 1.5 points
Historical averages:
  • Bullish: 38.5%
  • Neutral: 31.0%
  • Bearish: 30.5%

Take the Sentiment Survey.


AAII Asset Allocation Survey

Individual investors’ fixed-income allocations rebounded last month after having previously fallen to their lowest level in nearly a decade. More about the latest results.

June AAII Asset Allocation Survey results:
  • Stocks and stock funds: 68.6%, down 1.4 percentage points
  • Bonds and bond funds: 15.7%, up 1.6 percentage points
  • Cash: 15.7%, down 0.2 percentage points
June AAII Asset Allocation Details:
  • Stocks: 31.8%, up 0.6 percentage points
  • Stock Funds: 36.8%, down 2.0 percentage points
  • Bonds: 3.3%, up 0.7 percentage points
  • Bond Funds: 12.5%, up 0.9 percentage points

Take the Asset Allocation Survey.


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The Week Ahead

Dow component JPMorgan Chase & Co. (JPM) will report second-quarter results on Friday. Joining it will be seven members of the S&P 500: PepsiCo Inc. (PEP) on Tuesday; Fastenal Company (FAST) on Wednesday; Delta Air Lines Inc. (DAL) on Thursday; and Citigroup Inc. (C), PNC Financial Services Group Inc. (PNC) and Wells Fargo & Co. (WFC) on Friday.

The first economic report of note will be the May JOLTS report, released on Tuesday. Wednesday will feature the June Producer Price Index (PPI) and May wholesale trade. The June Consumer Price Index (CPI) will be released on Thursday. Friday will feature June import and export prices and the University of Michigan’s preliminary July consumer confidence survey.

Four Federal Reserve officials will make public appearances: Minneapolis president Neel Kashkari on Monday and Thursday; New York president John Williams on Wednesday; Philadelphia president Patrick Harker on Thursday; and Atlanta president Raphael Bostic on Friday.

The Treasury Department will auction $33 billion of three-year notes on Tuesday, $22 billion of 10-year notes on Wednesday and $14 billion of 30-year bonds on Thursday.


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